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Review: Lords of Finance - The Bankers Who Broke the World (Liaquat Ahamed)

Taken from NY Times & Dannyreviews.com

Despite the subtitle, Lords of Finance does not focus on the 1929 Crash or the Great Depression, but starts in 1914 and offers a financial history of the next twenty years, from a central bank perspective. Ahamed covers the financing of the First World War, the arguments over war reparations, the Weimar hyperinflation, the gold standard and its problems, the crash of 1929, bank panics and the Great Depression, and the responses to these by banks and governments.

Much of Lords of Finance is biographical. Four bankers are at its center: Montagu Norman at the Bank of England, Hjalmar Schacht at the Currency Commission and then the Reichsbank, Benjamin Strong, at the Federal Reserve Bank of New York until his death in 1928, and Emile Moreau at the Banque de France. Maynard Keynes serves as something of a foil to those, and there are brief sketches of many other figures as well. This biographical material helps us understand the motivations of the key actors and their interactions, with one another and with their governments, but there is often more detail than seems helpful.

This book is a magisterial work by Liaquat Ahamed, a veteran hedge fund manager and Brookings Institution trustee. A grand, sweeping narrative of immense scope and power, the book describes a world that long ago receded from memory: the West after World War I, a time of economic fragility, of bubbles followed by busts and of a cascading series of events that led to the Great Depression.

From a literary point of view — Ahamed has a gift for phrase-making and storytelling that most full-time writers would envy — the decision to build “Lords of Finance” around these four men is a brilliant conceit. Each of them was a powerful personality, with the full range of strengths and weaknesses, insights and eccentricities. Because much of the book concerns decisions, for instance, to raise or lower interest rates, you need great characters to pull the story along, and Ahamed not only has them but also knows how to make them come alive. Strong is the domineering American; Schacht the arrogant, headstrong German; Norman and Moreau the prideful Europeans. Strong and Norman became close friends, and their letters to each other are a rich source of material, sometimes quite touching.

But as Ahamed’s narrative makes clear, it’s also a little unfair to portray these men as “the bankers who broke the world,” as the subtitle phrases it. For one thing, by the middle of 1931, Norman was the only one of the four still in his job. (Strong, who for all intents and purposes invented the role of Federal Reserve chairman, died in 1928.) For another, they each became famous not because of their mistakes but because of their triumphs. To take the most striking example, Schacht, a prosperous banker, was made Germany’s “currency commissioner” in November 1923, when that country’s hyperinflation was completely out of control. (How bad was it? “On Nov. 5,” Ahamed writes, “the price of a two-kilo loaf of bread had soared from 20 billion marks to 140 billion, sparking off nationwide riots.”) In a brilliant stroke, Schacht created a new currency, the Rentenmark, then chose the exact right moment to fix it to the mark (at 1 trillion marks to one!). In so doing, he restored faith in Germany’s currency and beat back inflation. The German press took to calling him the “Miracle Man.”

There's no attempt in Lords of Finance to present any macroeconomic theory, however, and Ahamed concludes with a non-explanation: "More than anything else, therefore, the Great Depression was caused by a failure of intellectual will, a lack of understanding about how the economy operated."